FEDERAL FINANCIAL COURT Judgment of 27.2.2019, I R 81/17

ECLI:DE:BFH:2019:U.270219.IR81.17.0

 

Income adjustment in accordance with section 1 (1) AStG for write-downs to the going-concern value of loan receivables issued by the Group and for the formation of provisions due to the utilisation of a guarantee

 

Guiding Principles

 

1. the insufficient collateralisation of a loan or a right of recourse from the utilisation of a guarantee is generally not part of the "terms and conditions" not customary for third parties within the meaning of section 1 (1) AStG. The same applies to Article 9, para. 1 OECD-MustAbk (here: Article 9, para. 1 DBA-Austria 2000).

 

2 Art. 9 para. 1 OECD-MustAbk (here: Art. 9 para. 1 DBA-Austria 2000) does not restrict the scope of correction of § 1 para. 1 AStG to so-called "conditions". price adjustments, but also enables the neutralisation of the profit-reducing derecognition of a loan claim or a write-down to the going-concern value thereof (contrary to Senate rulings of 24 June 2015 - I R 29/14, BFHE 250, 386, BStBl II 2016, 258, and of 17 December 2014 - I R 23/13, BFHE 248, 170, BStBl II 2016, 261).

 

3 Whether a correction under section 1(1) of the AStG conflicts with the principle of proportionality of Union law is determined by an overall assessment of the circumstances of the individual case. When correcting shareholder claims from loans or guarantees, the economic self-interest and financing responsibility on the one hand and the structural proximity to equity capital resources and the change in the asset and liquidity status of the lender or guarantor on the other must be taken into account.

 

Tenor

On appeal by the defendant, the judgment of the Finanzgericht Baden-Württemberg, Außensenate Freiburg, of 23 November 2017 - 3 K 2804/15 is set aside

The case is referred back to the Finanzgericht Baden-Württemberg, Außensenate Freiburg.

The decision on the costs of the proceedings is assigned to the latter.

Facts of the case

 

I.

1

The parties involved dispute the legality of an income adjustment under Section 1 of the Law on Taxation in Foreign Relations (Außensteuergesetz), as amended by the Law on the Reduction of Tax Benefits and Exemptions (Steuervergünstigungsabbaugesetz) of 16 May 2003 (BGBl I 2003, 660, BStBl I 2003, 321) --AStG--.

2

The applicant and appellant (the applicant), a domestic limited liability company, had held a 50% shareholding in A GmbH, a company established in Austria, since May 2001. The remaining 50% were held by natural persons not related to the applicant, who were also managing directors of A GmbH. The applicant granted A GmbH a total of five loans with a term of between nine and 362 days for a total amount of ... EUR The loans each bore interest at 5.5 % p.a. Different machines were assigned as collateral. In addition, by a contract dated 9 April 2003, the applicant gave a guarantee of EUR ... for a loan from the B Bank in Austria to A GmbH.

3

On 22 January 2002 A GmbH repaid to the applicant a partial amount of EUR ... and on 16 June 2002 a further partial amount of EUR ... Due to the negative business development of A GmbH, the plaintiff made a write-down to the partial value of the loans amounting to ... EUR on 31 December 2003. After bankruptcy proceedings had been initiated against the assets of A GmbH on 7 December 2004, the plaintiff was called upon by B Bank in a letter dated 17 December 2004 under the guarantee agreement in the amount of ... EUR. In this respect, the plaintiff formed a provision for liabilities as of 31 December 2004. In addition, it wrote off the residual value of the loans to A GmbH in the amount of ... EUR. The defendant and plaintiff in the appeal (the tax office --FA--) neutralised the reduction in profits caused by the write-downs at going-concern value and the provision in accordance with § 1 (1) AStG by means of off-balance sheet additions and increased taxable income by ... EUR (2003) and ... EUR (2004).

4

The action was successful (judgment of the Finance Court --FG-- Baden-Württemberg, Außensenate Freiburg, of 23 November 2017 - 3 K 2804/15, decisions of the Finance Courts --EFG-- 2018, 269).

5

By its appeal, the FA alleges infringement of substantive law and requests that the judgment under appeal be set aside and the action dismissed.

6

The applicant claims that the Court should dismiss the appeal.

7

The Federal Ministry of Finance has joined the proceedings (§ 122 (2) of the Fiscal Court Code --FGO--). It supports, without filing its own motion, the appeal of the FA.

Reasons for the decision

II.

8

The revision is well-founded. It leads to the revocation of the preliminary decision and to the referral of the case back to the FG for further proceedings and decision (§ 126 (3), first sentence, no. 2 FGO).

9

The findings of the lower court are not sufficient to determine whether the profit reductions based on the partial write-offs and the provision are to be corrected off-balance sheet in accordance with § 1 AStG.

10

1 If a taxpayer's income from business relations with a person close to him is reduced by the fact that, in the context of such business relations with a foreign country, he agrees terms and conditions which differ from those which independent third parties would have agreed under the same or similar circumstances, his income is to be assessed, without prejudice to other provisions under Section 1 (1) of the German Income Tax Act, as it would have been under the terms and conditions agreed between independent third parties. According to § 1 (4) AStG, a business relationship in this sense is any relationship under the law of obligations on which the income is based that is not an agreement under company law and which, either with the taxpayer or with the related party, is part of an activity to which §§ 13, 15, 18 or 21 of the Income Tax Act apply or, in the case of a foreign related party, would apply if the activity were carried out in Germany.

11

2) According to this, an off-balance-sheet addition of the profit reductions in question in the case in question pursuant to § 1 AStG is possible.

12

a) The loan relationship and the contract or free agency relationship between the plaintiff and A GmbH on which the guarantee is based are such business relationships, the conditions of which include (non-)collateralisation of the claims (still open in the Senate ruling of 17 December 2014 - I R 23/13, BFHE 248, 170, BStBl II 2016, 261, Rz 15). Although the term "condition" is not defined by law, in the ordinary course of business, however, in addition to agreements on the term, manner of repayment and the amount and date of payment of interest, agreements on the collateral to be provided are usually to be expected. In order to avoid repetition, reference is made to the statements made in the Senate ruling on parallel proceedings (dated 27 February 2019 - I R 73/16, BFHE 263, 525, BStBl II 2019, 394, margin no. 21).

13

(b) The FG has not made any findings on the question whether the collateralisation of the repayment claims from the loans with the machinery transferred by way of security and the lack of collateralisation of the guarantor's recourse claim -- also taking into account Austrian law -- correspond to what a third-party lender or guarantor not linked to A GmbH by a partnership relationship (ex ante) would have agreed. It did not --a consistent with its view--discuss the arm's length problem in more detail because it followed the previous Senate case law (judgements in BFHE 248, 170, BStBl II 2016, 261, and of 24 June 2015 - I R 29/14, BFHE 250, 386, BStBl II 2016, 258). According to that case-law, provisions modelled on Article 9(1) of the Organisation for Economic Cooperation and Development (OECD Model Tax Convention - OECD-MustAbk--), including the relevant provision in the dispute, namely Article 9(1) of the Convention between the Federal Republic of Germany and the Republic of Austria for the Avoidance of Double Taxation in connection with Taxes on Income and on Capital of 24 June 2015 - I R 29/14, BFHE 250, 386, BStBl II 2016, 258), should apply. According to that provision, it is only possible to make an adjustment to income under Article 1(1) of the AStG if the price agreed between the associated companies does not stand up to the arm's length principle in respect of its amount (its appropriateness). However, the Senate does not adhere to this case law. On the contrary, the scope of the correction in Article 9(1) OECD MustAbk also allows the neutralisation of the profit-reducing derecognition of a loan claim or a write-down to its going-concern value. For the reasons given, reference is again made to the Senate ruling in BFHE 263, 525, BStBl II 2019, 394 (margin no. 24 ff.). In this respect, there is no different result for Article 9, para. 1 DBA-Austria 2000.

14

c) An arm's length settlement within the scope of § 1 para. 1 AStG is not dispensable for other reasons.

15

aa) If, in the plaintiff's situation, an external third party as lender or guarantor was not prepared to extend the loans secured by the machinery transferred by way of security to A GmbH or to assume the guarantee to B Bank without valuable collateralisation of the recourse claim, the so-called retention within the Group would not prevent the facts of the case pursuant to § 1 AStG. On the one hand, the plaintiff did not have a majority shareholding in A GmbH with its 50% stake, so that the existence of a group relationship is already doubtful. Secondly, the topos of the so-called group retention merely describes the legal and economic framework of the inter-company relationship and expresses the customary practice of not securing credit claims within a group of companies in the same way as between strangers. However, the possibilities of the controlling shareholder to exert influence on the borrower alone cannot be regarded as customary (valuable) collateral for the repayment claim in the sense of an active purchase obligation. Reference is also made in this respect to the Senate ruling in the parallel case (BFHE 263, 525, BStBl II 2019, 394, marginals 13, 18).

16

bb) The reduction in income would have been achieved within the meaning of § 1 AStG by ("thereby") the lack of or insufficient collateralisation (still left open in Senate rulings in BFHE 250, 386, BStBl II 2016, 258, margin note 16, and in BFHE 248, 170, BStBl II 2016, 261, margin note 15). The decisive factor here is -- in the sense of the principle of causation (see Senate decision of 18 April 2018 - I R 37/16, BFHE 261, 166, BStBl II 2019, 73, margin no. 23) -- the "triggering moment" for the profit-reducing write-off of receivables or the formation of provisions. In the assessment required for this purpose, the insolvency of the A GmbH is not to be taken into account, but rather the inadequate collateralisation, because the plaintiff has linked its claim to repayment of the loan or recourse to the economic development of its subsidiary and such a "mixing of asset risks" would not have occurred if valuable security rights had been granted.

17

(cc) Finally, Union law does not oppose a correction of income under Section 1(1) of the AStG either.

18

(1) According to the case-law of the Court of Justice of the European Union -formerly the European Court of Justice- (ECJ), a rule such as that laid down in Section 1(1) of the Coreper Act constitutes a restriction on the freedom of establishment justified in order to safeguard the balanced distribution of taxation powers between Member States (Article 43 of the Treaty establishing the European Community, as amended by the Treaty of Nice amending the Treaty on European Union, the Treaties establishing the European Communities and certain related acts, Official Journal of the European Communities 2002, No C 325, 1) (now Article 49 of the Treaty on the Functioning of the European Union as amended by the Treaty of Lisbon amending the Treaty on European Union and the Treaty establishing the European Community, Official Journal of the European Union 2008, No C 115, 47; ECJ judgment Hornbach-Baumarkt of 31 May 2018 - C-382/16, EU:C:2018:366, Supreme Court Financial Jurisdiction 2018, 580).

19

(2) Insofar as the ECJ, in its decision in favour of the free assumption of guarantee and patronage commitments within the scope of its considerations on proportionality, has recognised that the economic self-interest of the group parent company in its affiliated companies and the certain responsibility as a shareholder in financing these companies justify ("declare") business transactions under conditions that are not at arm's length and can therefore stand in the way of an adjustment under Section 1 of the German Income Tax Act, this restriction does not apply in the present case.

20

In its ruling on the parallel case (BFHE 263, 525, BStBl II 2019, 394, marginals 13, 18), the Senate stated that if the provision of borrowed capital by a shareholder compensates for the company's insufficient equity capital resources and this financing is the prerequisite for the loan-receiving company to be able to (continue to) fulfil the economic function intended for it, different treatment of contribution and loan defaults is ruled out, taking into account the claim to the validity of profit deferral in accordance with arm's length conditions, which is also recognised under EU law. The same would apply to the dispute.

21

(3) The contested judgment is based on a different legal assessment. It must therefore be set aside. The case must be referred back to the FG in order to enable it to make the necessary findings on the arm's length comparison.

22

(4) The transfer of the decision on costs is based on Section 143(2) FGO.